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| Official portrait of Federal Reserve Chairman Ben Bernanke. (Photo credit: Wikipedia) |
As of late the U.S. Dollar has been climbing, Then, today, Ben Bernanke spoke and the U.S. Dollar plunged. ZeroHedge described the reaction to Bernanke's words:
A number of different credible sources have called for lower silver prices:The Chairman’s statement that caught our attention and that we could see exciting markets was "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives then we would have to push back against that." There is nothing like a clear affirmation of the “Fed Put” to create another round of risk taking and aggressive behavior in the markets. The simplistic interpretation is that the Fed will never take away the accommodation, because the central bank cannot let markets “tighten,” which is a euphemism for go down.In a simple stroke, the Fed Chairman has undone the work of his communications of last month. The credibility that began to emerge from the June 19th press conference is gone. There is a large segment in the investment community that believes the Chairman cannot exit this policy, and his statement about not letting markets tighten only strengthens their case. The Chairman has returned the markets to the point where he has lost control of monetary policy, again.
Instead of going down, silver (and gold) has gone up after Ben Bernanke's press conference. Perhaps a thank you card is in order for the Fed Chair, then again maybe not.
Some theorize that quantitative easing cannot end. ZeroHedge made the case well writing about the January 29-30 FOMC Minutes:
It has become increasingly difficult to sort out the market price of silver versus the effects of the Fed's monetary policy. Likewise, the price discovery has become suspect as quantitative easing has expanded. So, it shouldn't be surprising, given the distortions created by Fed policy, that silver has become unpredictable.Here is the sentence that caused such consternation:“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases (the Fed’s open-ended, $85 billion-a-month debt monetization program called ‘quantitative easing’, DS). Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behaviour that could undermine financial stability.”Here is how one may freely translate it: “Guys, let’s face it: All this money printing is not without costs and risks. Three problems present themselves:1) The bigger our balance sheet gets (currently, $3trillion and counting), the more difficult it will be to ever load off some of these assets in the future. When we start liquidating, markets will panic. We might end up having absolutely no maneuvering space whatsoever.2) All this money printing will one day feed into higher headline inflation that no statistical gimmickry will manage to hide. Then some folks may expect us to tighten policy, which we won’t be able to do because of 1).3) We are persistently manipulating quite a few major asset markets here. Against this backdrop, market participants are not able to price risk properly. We are encouraging financial risk taking and the type of behaviour that has led to the financial crisis in the first place.”
Longer term, if quantitative easing can't be withdrawn, and the economy can't return to health without constant support from the Fed, the silver price should achieve much higher levels.
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